UMG’s CEO Lucian Grande woke up one day and
figured out that Spotify was giving away too much music and it
was impacting digital sales, which have slumped considerably.The company controls a considerable amount of popular
music throughout the world. In some markets it’s
as much as 40 percent of all music sales, so when it doesn’t
like something, you can be assured that something’s gonna
change. Outside of the absurdity of all this, there is a point
here. And it comes down to the funnel.

You see Spotify uses free music as a customer
acquisition funnel. By getting the largest number of
people possible playing music, Spotify believes that it can
convert a significant number of them into the paid products.
Spotify has pushed to create the biggest funnel possible by
giving unlimited free music on the desktop, and allowing
shuffle play listening for free on mobile phones.

All information has shown that Spotify has had a great year.
Its growth numbers in free and paid listeners has grown
tremendously. Early data signals are showing that Spotify
ate into other free services, like YouTube. And while the company wheels out
data points that claims it hasn’t eaten into iTunes sales, it bends
credulity to believe that Spotify hasn’t eaten into
track sales.

Think Accordion, Not Funnel

The main point of Spotify’s troubles comes down
to how it considers free playback. The company would
have much more success in identifying those who would pay by
considering free as an accordion that expands and contracts
from time to time. Instead of 100 percent free plays all the
time, the company could limit free playback occasionally, or
better yet, carve up its user base into intelligent
cohorts based on their playback behavior and value to the
company.

So if listener
creates awesome playlists that gets tons of followers, that
person gets as much free music they want. If someone shares
more playlists than most, free music. If one has more active
friends, give ‘em free. The company could even create scores
based on user’s future possibility that they might subscribe
and keep them around. Others should see a wall when they get to
a certain number of plays. And when Spotify’s funnel starts to
collapse, open it up again. Free music for
everyone.

It has been my contention that sooner or later, Spotify will
have to have a system like this in place. Right now, the
content costs are crushing to the company, and eventually,
playtime will be over. Time to get the books right. But right
now in its run-up to an initial public offering the company is
100 percent focused on growth. Therefore, it must keep the
funnel as big as possible.

And finally, it’s absurd to think that the major labels are
going to do anything to jeopardize Spotify’s IPO. All the labels own a chunk
in Spotify and will benefit from the IPO. It could be big
money. Just last year UMG made hundreds of millions on Beat
Electronics sale to Apple. So free music might be more limited
sooner or later. But let’s not pretend free music is going
anywhere before Spotify makes labels millions.

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